understanding smart contracts

Understanding Smart Contracts

The idea of smart contracts predates the invention of the cryptocurrency, Bitcoin in 2010. However, it was the launch of Ethereum in 2014, with the possibility of programmable blockchain logic, that brought the idea to life. Now this programmable logic — commonly referred to as “smart contracts” — is enabling blockchain technology across a multitude of use cases in different industry sectors.

I am going to try explain what smart contract are in this article and how they can be used. Honestly, I have been fascinated by smart contracts ever since I came across them and as I critically think of how best they can be applied.

So, what is a smart contract?

A smart contract is a piece of code programmed onto a blockchain, which defines the terms of a particular transaction. Upon the receipt of a given trigger or input, the smart contract will execute and perform its assigned tasks.

All smart contracts share some common properties;

  • Because they exist on the blockchain, they have a state, like RAM in a computer does, and this state is shared across the entire network. So, each node running this blockchain has a copy of the state of the smart contract.
  • They cannot be altered. Although there are ways to extend them or replace parts — if such action has been foreseen by the developers — there is no way to covertly manipulate their content without drawing the attention of the network.
  • The logic of a smart contract cannot be distorted, so there is no room for interpretation. That is why they’re referred to as a “contract”. They act like an agreement between parties, but one which needs no judge, because the output is produced from the input deterministically.

Smart contracts gave us the opportunity to create any kind of token without having to launch an entirely new blockchain. With the emergence of Ethereum, a token became just a piece of code — a smart contract — with certain functions including enabling the “transfer” of digital assets and the ability to “read” the account content of token holders.

It is possible to create escrow agreements or futures, which are based on the occurrence of certain conditions in order to be released. For example, a smart contract could be programmed to release funds for someone’s birthday each year. It could also be programmed to release payment once someone confirms receipt of delivered goods. It could be used to enforce particular rights for holders of digital assets. Some of these ideas will be explored in a later section of this article covering applications of smart contracts.

Benefits and challenges of Smart contracts

Smart contracts offer several benefits when they’re deployed appropriately. They can allow people from around the globe to transact with one another without needing an intermediary, reducing the costs of middlemen and brokers.

Because there is no third party involved, there is no risk of manipulation. Smart contracts can reduce administration, saving time. They offer complete autonomy, and because everything is backed up on to the blockchain, smart contracts are completely safe against loss of data.

One significant challenge with smart contracts is that they’re irreversible. If the code has bugs, then it could be that unwanted transactions occur and there is currently no way to undo them.

The Evolution of Smart Contracts

The idea of smart contracts was put forward by Nick Szabo in a 1997 paper. Szabo recognized that smart contracts could be deployed on a distributed ledger, which would be supervised by the machines running the network.

Bitcoin, as the very first implementation of blockchain, offered a basic functionality to execute some logic, though it was not capable of running complex algorithms. Therefore, one did not refer to it as a “smart contract” at that time. What Bitcoin essentially does is accounting. If someone sends a bitcoin payment, then their wallet address is updated with the new balance and the amount is attributed to the payee.

However, it was only in 2014 that smart contracts really started to take off. Once Ethereum launched, anyone with a reasonable understanding of coding could learn the Solidity programming language and start writing smart contracts for the Ethereum Virtual Machine, which is the central piece that interprets them.

Now, five years later after the idea has been adopted by several other blockchain projects and even Bitcoin has launched its own version of smart contract interpreters, developers now have a choice of blockchain platforms on which they can code smart contracts, build distributed applications (dApps), and issue digital tokens.

Practical Application of Smart Contracts


Smart contracts offer significant potential across the insurance sector, in speeding up and streamlining the claims process. A simple example could be in the case of life insurance. The policy terms would be encoded into the smart contract. In the event of a passing, the notarized death certificate would be provided as the input trigger for the smart contract to release the payment to the named beneficiaries.

This can be extended across different types of insurance, providing that the insurer can find a suitable oracle for the input of external data in the event of a claim. For example, in the case of travel disruption, an insurer could use flight data provided by the airlines to serve as a smart contract trigger.

Supply Chain and Logistics

The use of smart contracts is revolutionizing the supply chain and logistics sector. By itself, blockchain can provide a transparent and permanent record of the transit of goods between multiple handlers. With smart contracts in play, payments can be executed automatically upon the receipt of delivery, and inventory levels updated automatically in real-time.

There are further benefits to be had by integrating blockchain and smart contracts with other technologies. For example, quality checks could be performed by artificial intelligence robots and then payments executed according to the outcome. Internet-of-Things (IoT) enabled smart containers could send data instructing a smart contract to hold back payment. This could happen, for example, if temperatures weren’t maintained throughout the transport of perishable goods, or if containers have been opened by an unauthorized individual.

Rights for Digital Token Holders

Tokenization of real-world assets may mean individual token-holders also have particular rights. These rights can be coded onto a smart contract. For example, if company stocks are tokenized, shareholders have voting rights. With a smart contract, the person’s right to vote is granted when any given ballot is opened up. The smart contract allows them to cast their vote and records everything in a transparent way. Thus, it allows voting from remote, relieving shareholders from the need to be physically present or name a power of attorney.

Smart contracts have opened up a world of possibility for the many use cases of blockchain that we see today. As the technology develops, it’s beyond doubt that smart contracts will become as much a part of our everyday lives as the internet.

Peter Kivuti
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